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The Bankruptcy Protector

June 16, 2020

In re Hitz: Bankruptcy Case Shows Why Force Majeure should be De Rigueur in the Age of Coronavirus

By Woods Drinkwater, John T. Baxter

Over the past three months, as COVID-19 threatened to spread to more and more Americans, nearly every state-imposed restrictions — or outright prohibitions — for restaurants providing dine-in services. Restaurants were suddenly empty, with only take-out options available to those businesses able to adapt to that model. Restaurant revenue was decimated. But on the first of the month, landlords came calling.

In In re Hitz Restaurant Group, No. 20-B-05012, 2020 WL 2924523 (Bankr. N.D. Ill. June 3, 2020), the landlord, Kass Management Services, Inc. did indeed come calling. The landlord moved to enforce payment of post-petition rent under 11 U.S.C. § 365(d)(3) and modify the automatic stay under § 362(d)(1). In response, the restaurant argued that the force majeure provision of its lease released the restaurant from its post-petition payment obligations due to the government-mandated shutdown of its business. The court, in part, agreed.

Specifically, the court found that, under Illinois law, a state-ordered suspension of dine-in services is considered a triggering event for restaurants with applicable force majeure provisions in their lease. In this case, the restaurant’s lease provided: “Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by...laws, governmental action or inaction, orders of government...Lack of money shall not be grounds for Force Majeure.”

In Illinois, Executive Order 2020-7 took effect on March 16, 2020. That Order required “all businesses in the State of Illinois that offer food or beverages for on-premises consumption—including restaurants, bars, grocery stores, and food halls—[to] suspend service for and may not permit on-premises consumption.”

As both a “governmental action” and “order of government,” the Executive Order triggered the force majeure clause and impeded the restaurant’s ability to pay its post-petition rent. The Executive Order did not require the restaurant to shut down entirely, however, but only suspend its dine-in service. In fact, the Executive Order encouraged a continuation of service of “food and beverages so that they may be consumed off-premises . . . through means such as in-house delivery, third-party delivery, drive-through, and curbside pick-up.” Because the restaurant still had the ability to generate business, the Court determined that it should not be wholly excused from performing its obligation.

In its response to the landlord’s motion, the restaurant estimated that 75 percent of its square footage was rendered unusable during the time period covered by the Executive Order and its subsequent extensions. Taking that estimation as an admission until such time as the parties can convene for an evidentiary hearing, the court ruled that the force majeure provision excused the restaurant from paying 75 percent of its post-petition payment obligation. The restaurant was ordered to pay 25 percent rent and other obligations for the months following the effective date of the Executive Order until restrictions are lifted in whole or in part.

This case exemplifies the impact that the COVID-19 crisis is having on restaurants and the importance of the language of a lease. Many restaurants do not have leases that contain force majeure provisions, or have leases where the force majeure provision does not include “governmental action” as a triggering event. These provisions are strictly construed, so the language of such clauses are critical. If you own a restaurant or represent a restaurant client, force majeure provisions are likely the strongest protection at this time to abate, or otherwise reduce, burdensome rent obligations due to state-mandated closures. And as COVID-19 appears to likely remain a critical issue for the foreseeable future, these provisions should be sought by all restaurants seeking to enter into leases.

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